Lucy Frazer: Clause 94 introduces schedule 15, which covers a new requirement for large businesses to notify Her Majesty’s Revenue and Customs when they adopt an uncertain tax treatment. The clause seeks to reduce the legal interpretation tax gap, which stands at £5.8 billion—an issue that I am sure hon. Members agree is worth tackling. Through collaborative engagement with stakeholders and several formal consultations, the policy has been refined to minimise administrative burdens, while still achieving the policy objectives.
The requirement will apply only to the largest of UK businesses, companies or partnerships—those with a turnover of over £200 million per year, or a balance sheet total exceeding £2 billion. They will need to notify only those uncertainties that involve a tax difference of more than £5 million. The requirement will apply only to corporation tax, VAT, income tax and pay-as-you- earn returns, and will apply to returns due on or after 1 April 2022.
The Government are committed to ensuring that businesses pay the tax they owe. They have made significant inroads in reducing the tax gap, which fell from 7.5% of total theoretical liabilities in 2005-06 to 5.3% in 2019-20. However, there is further to go in protecting revenues in order to enable the Government to invest in our public services. Schedule 15 is designed to reduce the legal interpretation portion of the tax gap, the majority of which is attributable to large businesses.
Legal interpretation tax losses arise when businesses take a different view from HMRC of how the law should be applied, resulting in a different tax outcome. This issue has proven stubborn and difficult to tackle. Disputes often arise late in the day and are not identified in time for formal compliance enquiries to be undertaken,  resulting in irrecoverable losses to the Exchequer. The new notification requirement will tackle the legal interpretation tax gap in a well-targeted and proportionate way, raising £150 million over the next five years, while driving positive behavioural change. The new notification regime breaks new ground by enabling earlier identification of potentially high-risk legal interpretation disputes that often are not apparent from tax returns. That will help to level the playing field for those large businesses that are already transparent with HMRC about their uncertain tax treatments.
The changes made by clause 94 will affect approximately 2,300 large businesses, which will need to consider whether they have taken an uncertain tax position in their returns. If they have, they will now be required to notify HMRC. They will not need to notify HMRC if they have already brought the uncertain position to its attention by other means, such as through discussions with their customer compliance manager, by contacting HMRC’s customer engagement and support scheme, through the non-statutory clearance process, or through other legislative disclosure requirements.
The Government have listened carefully and have developed the policy design to arrive at a regime that is objective and simple to understand. There are now only two conditions that trigger the notification requirement, which consultees agreed are objective and clear. The first is if the business has made a provision in their accounts to recognise the uncertainty. The second is if the tax treatment is contrary to HMRC’s known interpretation of the law or how the law applies to a certain set of facts. Business will be able to find HMRC’s known position in statements, in published guidance and in briefs, as well as through their dealings with HMRC. HMRC’s guidance on the regime will set out information on those sources, so that taxpayers are not required to extensively search HMRC’s current and historical positions in order to comply.
In recognition of stakeholders’ concerns, the Government have decided, at this stage, not to include the third trigger—the substantial possibility test, which has been consulted on—in order to ensure that the regime is as clear and well targeted as possible on implementation. Businesses will incur costs in complying with this new requirement, both through familiarising themselves with the new rules, and through the ongoing requirement to comply with them. The Government have estimated that these costs, across the entire large business population, will be up to £3 million per year.
I assure the Committee that the Government consulted on this proposal extensively, and have thought carefully about how to keep these burdens to a minimum to ensure that the regime is proportionate while remaining effective. We have narrowed the list of circumstances in which businesses need to notify HMRC, reduced the number of taxes in scope, and raised the de minimis threshold to limit the burden on businesses.
HMRC will promptly acknowledge any notification by a business, and will assess the risks posed by the uncertainty and respond accordingly. This will not always end in litigation. Issues notified could result in guidance clarifications or legislative change. HMRC will deploy its resources in a cost-effective way to secure the best return for the Exchequer, and value for money for businesses, HMRC and the courts.
The Government’s commitment to supporting businesses and meeting their compliance obligations does not stop there. We will be monitoring the impacts on the large business population, and HMRC is determining the most suitable metrics through which to evaluate the regime. I reassure hon. Members that the Government are listening to businesses and providing additional support where required.
The Government have tabled technical amendments to schedule 15 to ensure the measures work as intended when a business makes a provision in respect of VAT or PAYE to reflect tax uncertainty. The amendments address two issues in order to ensure that we place an obligation on businesses to notify HMRC only when they have the information to do so. The first, covered by amendments 7 and 9, concerns the timings of the notification obligation. The amendments ensure that businesses have no obligation to notify until they have made a provision. The second, covered by amendments 8 and 10, concerns partnership accounts. The Government’s amendments ensure that a partnership need notify HMRC only about provisions in its own accounts—not those in the accounts of its members.
I have emphasised the steps we have taken to ensure this regime is simple to comply with. The amendments ensure that there are no practical barriers to notification for PAYE and VAT, and I urge Members to accept them.
Let me try to pre-empt the points that will be made about the Scottish National party’s new clause 7. It would require the Government to publish an assessment comparing the rates of uncertain tax in the UK to those of all other OECD countries 12 months after the Act comes into effect. I assume that what the hon. Member for Glasgow Central is aiming for is an assessment of how effective the regime is at tackling the legal interpretation portion of the tax gap, in contrast to regimes in other OECD countries.
HMRC is one of only two revenue authorities that publish a comprehensive estimate of the tax gap annually. The few international authorities publish tax gap estimates use a range of estimates methodologies that provide different levels of tax gap information, making timely direct comparisons impossible. The majority of OECD countries do not have comparable regimes. In designing this measure, HMRC has learned lessons from two other notification regimes: those of Australia and the United States. However, these regimes operate differently in practice. For example, the Australian equivalent applies only to income tax and cannot be meaningfully compared. I therefore urge Members to reject the new clause.
This new requirement to notify will encourage earlier and open communication with HMRC about areas of tax uncertainty. It is designed to protect the public finances by reducing the legal interpretation portion of the tax gap. I commend clause 94 and schedule 15 to the Committee.